If your clients have past tax assessments that are under dispute with the Canada Re-venue Agency, you should warn them not to expect a refund for the 2006 tax year.

Even if your clients have filed a “notice of objection” against a former tax assessment or they are waiting for their day in Tax Court, effective April 1, 2007, the CRA will be able to scoop taxpayers’ refunds to pay off outstanding taxes.

The CRA has always been able to apply refunds to outstanding taxes that were not in dispute but simply unpaid, says Aurele Courcelles, manager of tax and estate planning with Investors Group Inc. in Winnipeg.

But in the past, the CRA had been prohibited under the Income Tax Act from grabbing a refund to pay off an outstanding amount until 90 days after the assessment or until “any objection or appeal by the taxpayer has been disposed of.”

Ottawa tightened that provision in the 2006 Budget Implementation Act, says Lorn Kutner, partner and leader of the tax team at Mintz & Partners in Toronto. The implementation legislation lifted this constraint on the CRA, he says.

“Now the CRA will be able offset a client’s tax liability, even though an objection has been filed,” says Kutner.

The new rule will apply to “a ton of objections,” he says — some of which were filed six or seven years ago. For example, Kutner points to taxpayers who were involved in tax shelters, including shelters involving charitable donations, film and software deals.

The rule will also apply to clients who got into tax shelters late this year, says Jamie Golombek, vice president of taxation and estate planning at AIM Funds Management Inc. in Toronto. “There’s a good chance the CRA will audit them,” he adds. And these cases take a long time to wind their way through the system.

Kutner suggests taxpayers should plan so that their anticipated tax refunds are minimized as much as possible. He also suggests employees who find themselves in this situation should apply to have their source deductions reduced. In order to do this, a client/employee would have to apply to the CRA using Form T1213 on the grounds of “undue hardship.”

If a client has made extra contributions to his or her RRSP, or has other expenses such as tuition, child care or charitable donations, and has proof, the CRA could approve the application and send a letter to the client’s employer authorizing lower taxes to be deducted from the client’s pay, Kutner says.

Kutner acknowledges that it may be too late to attempt this strategy for the current tax year. Whether such a strategy would be successful next year would depend on how quickly the CRA branch that processes Form T1213 implements the new legislation, he adds.

Besides, other tax experts are skeptical about this tactic. “I wonder whether the CRA would grant an ‘undue hardship’ application,” Golombek says.

Courcelles says the CRA “is not likely to provide a letter to reduce source deductions.”

It may be easier for self-employed clients to outmanoeuvre the new rule and hang onto their deductions.

Kutner suggests that because most self-employed clients pay their taxes in quarterly instalments, they could reduce the amount of their December instalment.

But this, too, may be a risky strategy, Courcelles cautions. You have to be sure that the client will be getting a refund, she says, “Or the CRA will charge taxes and interest.”

Heather Evans, tax lawyer and partner with Deloitte & Touche LLP, says that, in the case of clients who are self-employed or get the bulk of their income from their investments, it is good practice to review their tax situation late in the year.

They should pay the September instalment, she suggests, but could then decide about the December instalment. If the client’s company or investment portfolio has produced lower returns than anticipated, or if the client has triggered some tax losses or made a big charitable donation, he or she may have paid enough taxes already. “You should re-run the numbers,” says Evans.

Alternatively, Kutner suggests that you undertake some advance tax planning with your client. Once the approximate amount of your client’s refund is determined, you could write the CRA and ask that a similar amount be transferred forward to his or her 2007 instalment account.

@page_break@“The CRA doesn’t know the client is going to get a refund. It doesn’t know what the client’s profits will be. There’s no reason why it wouldn’t forward the amount,” says Kutner.

To ensure that the CRA forwards the correct amount to the correct account, Evans suggests that advisors put the request in writing. IE